Thursday, August 11, 2011

In a letter sent yesterday to Lottery Commission Chairman Dianne Lamberth, Arkansas Lottery Director Ernie Passailaigue said the Internal Revenue Service “has assessed penalties and interest of $99,673.29 for the entire calendar year of 2010” due to late payments of taxes withheld from lottery winners.

Passailaigue said the lottery’s CFO, Philip Miley, disclosed the matter to senior management yesterday. According to the letter, the “CFO considered this issue a routine accounting function and did not inform management of the issue until August 10, 2011.” Documents obtained by the Times show that Miley, who is set to retire in early September, received a letter from the IRS notifying the lottery of the penalty on April 11 of this year.

According to IRS documents (which you can see here), the lottery made 31 late tax payments in 2010, ranging from just one to 54 days late. Miley sent a letter to the lottery’s executive staff this morning explaining the problem. He said that “upon review of the schedule remitted with the IRS notice, the ALC finance staff noted several errors made by the IRS as to dates and amounts.” Passailaigue also maintains that the “IRS seems to have misunderstood when the deposits for calendar year 2010 were due.” A future meeting with the IRS should clarify the issue, he said.

The IRS requires that withheld taxes in excess of $100,000 be deposited the next business day. A similar penalty was assessed in 2009, at a cost of $4,297.10. That penalty was waived after Miley sent a letter to the IRS explaining why late payments had been made (Miley assumed the lottery was to remit payments on a monthly schedule instead of a semi-weekly schedule). On April 27 of this year, Miley requested a waiver of the $98,637.29. That request was denied. Miley told the IRS, “Any penalties assessed for this situation will be a direct dollar for dollar reduction in scholarship funds.”

More on the jump, including the IRS's response to Miley's waiver request and a comment from Lottery Commissioner Steve Faris.

From the IRS letter in return:

“We have thoroughly reviewed your case, but we find that the information provided does not establish reasonable cause. Therefore, we must deny the request to remove your penalty(s).

“You explained that you have a good history of making timely and accurate deposits. However, a review of your account history shows that we have charged similar penalties in the past.”

Lottery Commissioner and former state lawmaker Steve Faris, who has been critical of lottery operations since joining the commission, says this issue is “very concerning.”

“I think it’s a very concerning thing when the IRS issues a fine or a penalty toward any individual or entity,” Faris said. “I want to know as much about it as quickly as I can. Fortunately we’re meeting Monday so I’m sure this will be discussed in depth at that meeting. But it’s very concerning. I want a thorough explanation of how this happened and why. Any penalty is an unnecessary expense. As you know, our revenues are already down and this takes away almost $100,000 worth of scholarships that those who get cut off will say, ‘If we hadn’t had this penalty, I was next on the list.’”

Miley believes the lottery can still have the penalties waived despite the terse IRS response. He wrote:

“I have tried to have these penalties waived due to IRS errors and the IRS agreement made on May 7, 2010 [regarding late payments in 2009]. So far, I have been unsuccessful in getting this resolved, but feel that it can be resolved in favor of ALC given time and the right IRS contact to discuss this situation. Since I will be leaving ALC on September 9, I wanted to disclose all the above information to executive management so plans could be made to continue pursuing the waiver of the penalty.”

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